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Debts Which Survive Bankruptcy

On Behalf of | Apr 2, 2020 | Bankruptcy, Firm News

“Willful and Malicious Injuries”

By: Dean A. Langdon

When an individual completes a bankruptcy they get a discharge – a court order that permanently stops creditors from collecting debts. Not all debts are included in a discharge, such as child support, most taxes and most student loans. Other debts which might be discharged can be challenged by a creditor. One such claim is a debt for a “willful and malicious injury” to a person or their property. 11 U.S.C. § 523(a)(6). But how do you know if a debt arises from a “willful and malicious” injury?

On March 27, 2020, the Sixth Circuit Court of Appeals (which includes Kentucky) decided a case involving a debtor (David Berge). Berge was sued by MarketGraphics Research Group, which got a judgment him for violating federal copyright law and the Tennessee Consumer Protection Act (TCPA). Berge filed a chapter 7 bankruptcy and MarketGraphics asked the bankruptcy court to rule its judgment for $332,314.94 survived his bankruptcy as a debt arising from a willful and malicious injury. What did Berge do that harmed MarketGraphics? Berge’s father was an independent contractor for MarketGraphics in the Memphis, Tennessee area. MarketGraphics collected, analyzed and sold residential real estate data. Berge worked with his father to help collect data, but by 2012, when his father stopped working for MarketGraphics to start his own business, Berge was a realtor in Nashville, Tennessee. However, Berge helped his father start a new business which competed with MarketGraphics and which ultimately took about 75% of MarketGraphics clients.

MarketGraphics sued Berge (and his father, mother and the new companies they formed) and got an order requiring the Berges to cease competing with MarketGraphics. Berges’ parents filed bankruptcy before MarketGraphics got a judgment against them, but a judgment was entered against Berge finding that he 1) willfully or knowingly violated the TCPA; 2) willfully infringed on MarketGraphics copyrights; 3) acted together with his father to violate his father’s non-competition agreement; and 4) wrongfully impaired MarketGraphics’ goodwill and created unfair competition. The judgment resulted in Berge filing a chapter 7 bankruptcy of his own.

The bankruptcy court held a trial and ruled that the MarketGraphics debt should be discharged. MarketGraphics appealed, and the district court held the bankruptcy court used the wrong standard and sent the case back to be re-decided. The bankruptcy court again ruled the MarketGraphics debt did not survive the bankruptcy and the Court of Appeals allowed MarketGraphics to appeal directly to the Sixth Circuit to answer two questions: what is the proper standard to determine if a debt arises from a willful and malicious injury; and did the earlier judgment against Berge automatically require that the debt survive bankruptcy as a willful and malicious injury debt? The Court of Appeals affirmed the bankruptcy court and held that Berges’ debt to MarketGraphics was discharged by his bankruptcy.

Courts have used two tests to determine if a debt arises from a willful and malicious injury: a) was there an objective substantial certainty of harm or a subjective motive to cause harm (the “unitary” standard); or b) was there an act without just cause or excuse (malicious), done with knowledge or substantial certainty it will cause injury (willfulness) (the “two-pronged” standard). Since bankruptcy law requires an injury to be willful and malicious before it survives bankruptcy, the Court of Appeals ruled the unitary standard was incorrect. A creditor must prove both that a debtor intended or was substantially certain that an injury would occur (willfulness), and that there was no “just cause or excuse” for the debtors’ actions. The failure to prove either prong means the debt arising from such an injury will be discharged.

The Court of Appeals also affirmed the bankruptcy court’s decision that the earlier judgment against Berge did not automatically establish that the debt survived bankruptcy, because the standards for proving a copyright infringement and violation of the TCPA were not the same as the “willful and malicious” standard under bankruptcy law.

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